Winners of the Oil Crash

12/15/2015 12:08 pm EST


Matt McCall

Founder and President, Penn Financial Group

There are companies that will benefit from lower energy prices in the coming quarters, so Matt McCall, of Penn Financial Group, highlights a pair of names in two niche sectors—among others—who may be silently rejoicing as the price of oil continues to plummet.

The price of oil continues to fall with no bottom in sight as prices are now down to levels not seen in seven years. The selling is a combination of increasing supply versus stagnant demand as well as investors panicking. There will be a price in the near future where oil-related investments will be bargains for long-term investors. Until that time it is difficult to watch the carnage that has been caused by the sector-wide selling.

Not all is lost in the oil debacle of 2015. There are companies that will benefit from lower oil prices. The costs of making a product or offering a service will often time rely heavily on energy. Sectors that consider energy as one of their largest input costs should be smiling as they now realize it will cost less to produce their product today as it did last year at this time. When fourth quarter earnings are reported early next year there will be a long list of companies that beat on the bottom line because their cost of doing business right now is less than anyone expected due to low oil prices.

An obvious winner of low oil prices is the airlines that must fuel up their planes to hustle their customers around the globe. Demand has remained high in the industry even as terrorist activities have been increasing internationally. The big upside due to lower oil has not been reflected in the price of the airline stocks, which trade at multiples well below the overall US stock market.

Some examples of attractive valuations include American Airlines Group (AAL) with a forward P/E ratio of 6.9 and a PEG ratio of 0.59. Delta Air Lines (DAL) trades with a forward P/E ratio of 8.5 and a PEG ratio of 0.46. Discount airline Allegiant Travel (ALGT) trades with a slightly higher forward P/E ratio of 12.87, but a very low PEG ratio of 0.40. The entire sector has numbers that are not inline with the where the demand from customers and oil prices will be in 2016, thus big upside opportunity.

Another area that should be cheering low energy prices is the makers of rubber, plastics, rugs, etc. One such company is Mohawk Industries (MHK), the second largest producer of carpets and rugs and the world’s largest flooring manufacturer. The lower cost of oil could push up earnings per share by as much as 10% in the coming quarters. Not only will input costs drop, the cost of transporting goods around the world also declines as oil prices are lower.

These are only two niche sectors that will actually benefit from lower energy prices in the coming quarters. There are plenty more that are secretly smiling as oil dives below $35 per barrel.

Matt McCall, Founder and President, Penn Financial Group

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